Nigerian Brewery Sector - Nigeria’s No1 Economy · We update our view on Nigerian brewery sector...

Please see the last page of this report for important disclosures and analyst certification

October 2010

Investment Summary

We update our view on Nigerian brewery sector with NEUTRAL ratings

on the 2 biggest players - Nigerian Breweries Plc and Guinness Nigeria

Plc with pooled market share of c.80%.

� Volume drivers still at work. With a 15m hectolitres (mhl), (2009 est.)

according it the second largest in SSA, the Nigerian brewery market, in our

estimate, will grow to 23mhl by 2015 premised on the combined impact of beer

per capita consumption (PCC) growth (13litres expected vs. 10litres currently),

population build-up (2.8% p.a.) and nominal per capita income growth (8.3%

p.a.). Consumption of brewed products is intrinsically linked to GDP growth

which is rising across SSA economies, with Nigeria expected to deliver above-

average growth performance, based on IMF and World Bank forecasts.

� Eyed by the bigwigs… Nigerian brewery sector is increasingly attracting

the attention of global majors: SAB Miller, Carlsberg and Castel. These interests

re-affirm the growth opportunities embedded in the sector and we expect it to

generate a positive development for the sector in terms of volume growth and

deeper market penetration.

� …in view of robust investment thesis. The investment case for the

Nigerian brewery sector is uncomplicated: the sector is largely dominated by 2

global players, Heineken and Diageo, through their subsidiaries (Nigerian

Breweries Plc and Guinness Nigeria Plc respectively); beer consumption is

notably at low levels with PCC of 10litres, which is a 56% discount to

comparative benchmarks and 40% discount to levels attained in the 1980s;

medium to long-term economic outlook is healthy at 5%-plus real GDP growth

expectation over the next decade; supportive demographics characterised by

growing youthful population with avid thirst for fun and social culture that

encourages festivities. These fundamentals form the basis of our conviction for

a deserving long-term call on the sector.

� Credible route to economic growth potential… Nigerian brewers are moderately shielded against Nigerian macroeconomic risks as sales recover

quite swiftly from unfavourable economic cycles, proven once again in the

2009/10 financial years. We believe the sector provides a solid route to

accumulate direct exposure to Nigeria’s medium-term growth potential, and

indeed SSA, as we think domestic beer consumption rate will increasingly set

the Nigerian market apart on the heels of expanding economy. We will play this

growth theme through NB and Guinness from a long-term perspective given

their operational scale, market dominance and impressive CAPEX.

� …but we are NEUTRAL on full valuation, in the near-term. From a

valuation standpoint, the shares of quoted brewers offer a long-term attractive

proposition but, on a 12-month horizon we find the risk-reward profile limited,

as the shares have performed strongly (41% in 12 months) and trade at

forward P/E multiple of 17.1x and EV/2010e EBITDA of 9.8x. We are on the

sidelines to make an inroad into the sector’s long-term growth prospect on

better valuation attraction. At this point, we think direct acquisition and

repositioning of fringe players is a potent source of alpha.

Nigerian Brewery Sector Brewing growth; malting value

NEUTRAL

Market Cap: N855bn (US$5.7bn)

% of NSE: 14.3%

Forward P/E: 17.1x

EV/2010 EBITDA: 9.8x

2010 Div Yield: 5.2%

52-week perf: 40.9%

Upside potential: 2.1%

52-week share price performance (rebased to Sep’09)

Source: NSE, Vetiva Research

Vetiva Capital Management Limited

266B Kofo Abayomi Street

Victoria Island, Lagos

Tel: +234-1-46175213

Fax: +234-1-4617524

Email: [email protected]

Analyst

Ahmed Razaq

[email protected]

0.8

1.0

1.2

1.4

1.6

S-09 D-09 M-10 J-10 S-10

NB

GUINNESS

NSE ASI

Nigerian Brewery Sector Update: Brewing Growth; Malting Value I October 2010 I 1

Nigeria I Breweries I Equities

Table of Contents Investment Summary .................... 1

Nigeria in Global Context .................... 2

Overview of the Beverages Market .................... 4

Industry Structure .................... 5 Competitive Strategies .................... 10 Industry Outlook .................... 12

Investment Thesis .................... 18 Quoted Companies .................... 21 - 40

• Valuation and recommendation • Guinness Nigeria Plc • Nigerian Breweries Plc • Others

Un-quoted Companies ................... 41

Disclosures ................... 44



4.4% 5.0%

Nigeria in global context

� The African market is still small relative to the global beer market. As at

2008 (the latest figure available), Africa accounted for just 5% of global beer

production while Nigeria accounted for an abysmally low share of less than

1% (0.8% precisely).

� The competitive landscape in the African brewery market is shaped by 4

global players: SABMiller, Heineken, Castel and Diageo with a pooled market

share of above 80% in the continent. Based on 2008 figure, Africa has a beer

market of 92 mhl with 32% of this demand coming from South Africa alone.

Nigeria has the second largest beer market with a production size of 15mhl

p.a. representing 15% of African market. To put this in perspective, the

Nigerian beer market has a size roughly equivalent to the size of the whole

of Southern Africa (ex-South Africa).

� The four global players are operational in the Nigerian market with Diageo

and Heineken as the most active players through their majority-controlled

subsidiaries: Guinness Nigeria Plc (Guinness) and Consolidated Breweries for

Diageo; and Nigerian Breweries Plc (NB) for Heineken. Castel also launched

its foray into the Nigerian market through the acquisition of a majority stake

in International Breweries Plc.

� The table below gives the evolution of Africa’s beer market share on a global

scale.

Fig 1: Global beer market

Share of production by continent

2003 – 2008

Continents 2003 2004 2005 2006 2007 2008

Europe 34.9% 34.1% 34.1% 33.4% 33.1% 32.2%

Asia/Middle East 26.9% 28.5% 28.5% 30.0% 31.2% 31.7%

North America 22.2% 21.4% 20.9% 20.0% 19.4% 19.0%

South America 10.2% 10.2% 10.7% 10.6% 10.5% 11.0%

Africa 4.4% 4.4% 4.5% 4.6% 4.7% 5.0%

Australia/Oceania 1.4% 1.3% 1.3% 1.3% 1.2% 1.2%

TOTAL 100% 100% 100% 100% 100% 100%

Africa’s 2003 Share Africa’s 2008 Share

Source: Beverage Marketing Corporation, Vetiva Research estimate

Africa accounts for c.5% of global

beer production. Nigeria accounts

for <1%

South Africa is the largest beer

market in Africa (32%); Nigeria

occupies the 2nd position (15%)



� Over the past 9 years, beer volume growth in Africa has outpaced global

level by an average of 1.5x, making the region an emerging beer market in

the world. While global volume growth has been at 2.96% CAGR since 2000

(rising from 1.40bn hl to 1.8b hl in 2008), Africa’s beer volume grew by

4.48% CAGR from 62mhl in 2000 to 92mhl in 2008. This growth

performance gave uplift to Africa’s stake of global beer production to 5% and

further asserts the immense room for future growth.

� Despite this growth, the current level still appears quite imbalanced putting

into perspective the geographic metric that shows Sub Saharan Africa (SSA)

controlling 11.5% of world population. This disparity in the distribution of

global beer consumption level is much more pronounced in the context of the

Nigerian market. This is premised on the fact that about 99% of the

production volume in Nigeria is used to meet domestic demand. Hence, the

level of beer production gives some estimate as to the level of domestic beer

consumption.

� Hence, we argue that the Nigerian case presents an appealing growth theme

given that Nigeria controls 2.2% of global population base but controls barely

0.8% of global beer production. Asides the per capita income level, as we

demonstrate in the subsequent sections below, population level is another

strong intrinsic driver of beer volume growth.

� As depicted in the figure below, if we are to assume convergence and

normalize the current gross imbalance between population and beer

production volume by modeling an average beer volume share multiple of

1.69x population share (under the aggressive assumption that per capita

income differential is held constant), then the embedded growth potential in

the Nigerian brewery market is glaringly emphasized. This underscores our

long-term call on the sector. Hence, it is no more surprising seeing global

brewery giants scaling up their CAPEX programme to tap this enormous

growth story. (See the coming of the giants on Page 5).

Fig2. Beer volume statistics

Back-of-the-envelope estimate of growth potential

Key Headlines Nigeria China South Africa

Population share

2.2% 19.8% 0.7%

Beer volume share

0.8% 22.8% 1.6%

Beer volume share-to-population share 0.34x 1.15x 2.23x

Actual beer PCC (liter) p.a. 9.71 30.94 59.83

Implied estimates

Potential beer volume share 3.8% 33.4% 1.2%

Implied beer production level (mhl) 68.1 601.1 21.2

Current beer production (mhl) 15.1 401.0 28.0

Production (deficit)/Surplus (mhl) (53.0) (200.1) 6.8

Implied beer PCC (litter) p.a. 45.4 45.4 45.2

Implied Growth 367.3% 46.7% -24.4%

Source: Vetiva Research estimate

Nigeria’s volume growth has

outpaced global level due to

powerful base effects…

Further growth opportunities

abound



45%

42%

10%

1% 1%1%

Beer

CSD

Juice

Spirits

Wine

RTDs

Beverages market Overview

� Nigerian beverages market is heavily driven by beer and carbonated soft

drink (CSD), with both controlling about 87% of beverages consumption.

While the products in the beverages space have some level of

complementarities in production, traditionally there is a clear line of focus

among the key players in Nigeria. The CSD market is dominated by Nigerian

Bottling Company Plc (NBC) [the bottler of Coca Cola brand] and 7UP Plc

(PepsiCo franchise bottler) in conjunction with a rising number of fringe

players.

� In recent times, we have observed an emerging theme among the key

players with gradual convergence of the beer and CSD market segments.

Brewers are increasingly exploring the soft drink market by enlarging their

product portfolios, through their non-alcoholic product variants and capturing

an increasing share of consumers’ discretionary spending. A classic instance

is the drive of NB toward product portfolio optimization by the introduction of

the Fayrouz brand to its product kit. Being a non-alcoholic brand, such

products have a strong potential to permeate a broader market (breaking

religion boundaries – a key factor in the Nigerian brewery market) and pose

good competition to the key CSD producers.

� Spirits, the key strength of the Diageo Group (the parent Company of the

second largest Nigerian brewer - Guinness), is still a very shallow market in

Nigeria as it remains unappealing in aggregate consumption basket. However

its stout brand remains a market favorite, with Nigeria ranking as the second

largest market for the Guinness Stout brand world-wide.

� In this report, we focus on the lion share of the Nigerian beverages market:

the beer segment; and analyze the key players in this market though

consolidating their non-beer production volume which we think will not

significantly change the substance of our opinion.

Source: Heineken, Vetiva Research

Fig 3:

Nigerian beverage market is dominated by beer and CSD (2009 est)

Beer and CSD control 87% of

beverage market in Nigeria…

…brewers are closing the divide by

venturing into non-alcoholic drinks



57.0%25.0%

9.5%

8.5% NB Plc

Guinness

ConsBrw

Others

Brewery industry structure

� A brewery market of “The Big Two”: The Nigerian brewery market is

currently a 15mhl market and typifies a classic illustration of a duopoly.

Though there are handful marginal players, the market is dominantly driven

by Nigerian Breweries Plc and Guinness Nigeria Plc with a combined market

share of c.80%. From a holistic view, this concentration level is much more

pronounced when we consider the underlying ownership of the 2 brewers: NB

Plc is majority-owned by Heineken, and Guinness Nigeria Plc is majority-

owned by the Diageo Group. The 3rd key player (market share of little less

than 10%) is Consolidated Breweries Limited (not listed), also majority-

owned by the Heineken N.V. Group. In summary, Nigeria is a beer market of

2 global players with the Heineken group holding the ace (controls c.70%

market share through its 2 subsidiaries).

While the operations of Consolidated Breweries Limited and Nigerian

Breweries Plc are consolidated in the financials of the Heineken Group, the 2

subsidiaries continue to operate as separate entities, strategically focusing on

different segments of the beer market. The former is Heineken’s route to the

low-end Nigerian market while NB operates in the premium and mainstream

markets.

Source: Companies, Vetiva Research estimates

� The coming of the giants: Late to the party? It is incredible that

SABMiller does not have footprint in Nigeria, the second biggest economy

south of the Sahara, and yet remains the biggest brewer in Africa. SABMiller

occupies a coveted position among the top 4 global brewers and operates in 6

continents.

Fig 4:

Beer market share estimate

NB and Guinness control c.80% of

Nigerian beer market

Heineken and Diageo remain the

ultimate players with controlling

stakes in NB and Guinness

respectively



However, the tune appears set to take a different gear as the brewer has

identified Nigeria as the next growth frontier and made a strategic entry in

2008 via the acquisition of 57% effective interest in Pabod Breweries Limited,

80% effective interest in Voltic Nigeria Limited (a water business) and

Standard Breweries Limited as launching pads. We have observed that

SABMiller is attempting a gradual inroad into the broader Nigerian beverages

market to foster its time-tested full beverage portfolio strategy. While

SABMiller is yet to boil up competitive pressure, we are beginning to feel its

presence softly with the recent introduction of one of its international

premium brands, Castle Milk Stout (CMS), through its subsidiary, Pabod

Breweries.

Castel, another global brewery giant with rich African experience, has also

landed quietly in the Nigerian market with the acquisition of majority stake in

International Breweries Plc. International Breweries Plc is one of the fringe

players quoted on the Nigerian Stock Exchange (NSE) with an installed

capacity of about 500,000 hl. Historical performance has been troubled with

11 years of operating losses. It is expected that the coming on board of

Castel and the full optimisation of an on-going CAPEX programme should set

the stage for a turnaround. The recent performance of the company signals

this turnaround potential as Q2’10 scorecard reflects significant volume

growth and return to profitability.

In a similar dimension, Carlsberg, the 4th largest brewer in the world, is also

making a leveraged entry into the Nigerian market. The company just sealed

a partnership agreement with International Breweries Plc for the production

and commercialisation of its notable trademarks; Kronenbourg and Wilfort.

While the new entrants are yet to rile up the sector, we think these multiple

entries will have a significant long-term implication on the sector’s economics.

In our view, ceding of significant market share to the new entrants will be

gradual as the volume share and brand positions of Guinness and NB are

strong hurdles to cross. The locals are no strangers to the thick brew;

Guinness has been in Africa since the early 19th century and has been

brewed in Lagos for more than 50 years. NB has a very rich Nigerian

experience with an extensively solid distribution platform and has successfully

built a strong customer base.

Fig 5: Key Global Players in Nigeria

Old Line-up Subsidiary

Diageo Guinness Plc

Heineken Nigerian Breweries plc,

Consolidated Breweries

New Line-up

SAB Miller Pabod Breweries, Standard Breweries, Voltic

Castel International Breweries Plc

Carlsberg* International Breweries Plc

*International Breweries has partnership agreement with Carlsberg for the production and commercialization of its trademarks in

Nigeria. It is not a subsidiary of carlsberg.

Source: Vetiva Research

Global majors are coming; SAB

Miller, Carlsberg and Castel are

already in the game, though mildly

Ceding market share from NB and

Guinness could be challenging

though doable



10.0

Peer Average

14.6

Global average

26.88

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

� Beer consumption at low ebb: The beer per capita consumption (PCC)

in Nigeria, based on 2009 estimate, stands at 10litres p.a. While this appears

quite low relative to African peers (14.6 litres) and global average (26.9

litres), it is crucial to stress that consumption growth over the past 10 years

has been robust at 10% CAGR from 5mhl in 1999 to 15mhl in 2009. The low

level of beer PCC is a function of many weaknesses amongst which are:

production constraint and infrastructural bottlenecks, both of which limit beer

availability and deeper penetration. While capacity expansion has constantly

been on the card for the existing players, current consumption level when

combined with expected growth in GDP per capita leaves ample headroom for

significant future investment in this sector if the growing beer demand must

be met.

Source: Heineken, SAB Miller, Diageo and Vetiva estimate

� Cost structure benefiting from backward integration strategy:

On the average, Nigerian brewers (which we have proxied by NB and

Guinness Plc) expend half of their revenues on direct input cost leaving them

with an average gross profit margin of 50%. In the context of African brewery

sector, this is very much in line with the performance of their African peers.

Fig 7: Cost of sales ratio of African brewers

Companies Countries COGS/Sales

Nigeria

Guinness Nigeria Plc Nigeria 50%

NB Plc Nigeria 53%

Average 51%

Selected African peers

East African Breweries Kenya 49%

SECHEBA Botswana 58%

SMB Morocco 50%

Average 52%

Source: Company financials, Vetiva Research

Fig 6:

Low beer PCC: a fundamental pointer to long-term growth potential

Beer PCC of 10litres is at a

significant discount to key peers

and global benchmarks

Cost structure not materially

different across key African brewers



� Following the ban on the importation of barley and barley malt in mid-1980s

(which was later lifted in 1999 and currently attracts 5% import duty),

industry majors have developed technical competence in their backward

integration strategy by substituting locally-grown sorghum and corn grits for

imported inputs (e.g. barley). While the local content strategy is still a well-

articulated pursuit, brewers still import about 25%-35% of their input needs

predominantly through joint purchase agreements with their parent

companies. This range is still within band, for instance, given a minimum

target of 60% local content policy set by Nigerian Breweries Plc.

� More recently, the local content strategy received further boost with the

commissioning in Lagos of the first can manufacturing plant in West Africa,

GZ Industry Nigeria Limited which has Rexam Plc (a publicly traded company

on the London Stock Exchange) as technical partner. Cans are gaining

significance as input component for brewers especially, as industry players

have over the years deliberately moved away from bottling their product

contents to the use of cans. Cans are a more efficient means of product

distribution for the brewers as it eliminates the logistics challenge of

retrieving empty bottles from consumers, as well as aids a deeper

penetration of consumer markets with brewed products. GZI has an installed

capacity of 600million cans p.a. and plans to double capacity to 1.2billion by

2011. While NB and Guinness have already placed a year’s demand on GZI’s

cans, we highlight that the efficiency gains from locally sourced cans will be

strongly reflective on margins over the medium-term as the proportion of

canned drinks expand from the current level of less than 10%. We also see

efficiency gains creeping in from reduced lead time which currently stands at

16-20 weeks for imported cans and the elimination of 20-25% damage rate

during shipment.

� Nonetheless, the brewers are still indirectly exposed to the volatility of

international price of aluminium as GZI has 100% dependence on imported

aluminium coils.

� We highlight that the local content initiative could prove more value accretive

to the wider economy, given that Nigeria, as the second largest sorghum

producer globally (after the United States), is self-sufficient in sorghum

production with an estimated 2009 production volume of 11.0million tons.

The potential of the agricultural sector (40% of GDP) is immense and huge

costs could be saved if the on-going sorghum initiative is pursued

sustainably.

� In a similar dimension, we highlight another twist to brewers’ continued

investment in the local raw material sourcing capability. For instance, in 2008

Nigerian Breweries acquired its 30,000 ton capacity Aba Malting Plant, which

is the largest in Africa. Our key attraction to this strategy is the potential

long-term margin impact and the resultant effect on value creation for the

brewers. The strategy is more instructive given our long-term view that the

sector will evolve to be more competitive as new entrants become more

aggressive. This will engender margin pressure stemming from weakening

pricing power. Hence, we continue to see strategies to improve margins now

as extremely positive from valuation standpoint.

Nigerian brewers still import about

25%-35% of their input needs

though local content strategy is

encouraging

Local sourcing of cans+ could be

margin-supportive in the medium-

term…

…though brewers are still exposed

to the volatility of global aluminum

prices as GZI is 100% dependent

on imported aluminum foils.

Cost structure not materially

different across key African brewers



32%

29%

24%

21%

26%

25%

22%24% 24% 24%

0%

5%

10%

15%

20%

25%

30%

35%

2006 2007 2008 2009 Average

NB Guinness

� OPEX, made up of S & D and Administrative expenses, gulps about 25% of

turnover. In order to defend their market share, key players have grown their

marketing budgets, making the sector visibly advert-intensive. In

2009FY, Guinness and NB respectively recorded 24% and 21% on this

expense line (as a proportion of sales) with advertising expenditure

representing more than half of that make-up. In our view, this elevates the

entry barriers for new players as significant investment is warranted to cede

market share from existing players.

Source: Companies’ financials, Vetiva estimate

� Route-to-market: Challenges remain despite retail outlet

activation: Brewing plants are relatively concentrated in the Western and

Southern Nigeria where the consumer markets are freely accessible and less

restricted by religion considerations. Supply chain distribution has been on

the back of key distributors. Key channels have traditionally been through

kiosks, provision stores and beer parlours in that order, based on Heineken’s

estimate. In recent times, we have observed aggressive innovation to

enhance beer availability to consumers and deepen penetration, since getting

the products to the final consumer is the name of the game. Brewers are now

activating retail outlets and providing warehouses to distributors who enjoy

preferential trade terms.

� While these, in addition to in-bar promotions, provision of chillers and cool

boxes in strategic locations, are meant to improve throughput, we highlight

that the cost implication could be disturbing if not efficiently managed.

Fig 8:

Brewers OPEX to sales ratio has been declining

Brewers are intensifying on advert

spend to ring-fence their market

shares against potential

encroachments…

OPEX line has shown appreciable

efficiency depicted by declining

OPEX-to-sales ratio

Retail outlet activation is

increasingly gaining grounds



Competitive Strategies

Typical of a duopoly market, the competitive tools in the brewery industry are

wide-ranging. Industry majors have vied to defend their market share while

numerous ‘micro brewers’ and fringe players continuously craft competitive

strategies to service their market niche. With the entrance of new global majors,

we expect the terrain to be challenging in the medium-term and even more so,

in the long-term. We highlight the following key strategies currently being

adopted by Nigerian brewers to service the beer population:

� Full beverage portfolio: Brewers are looking more at additional growth

frontiers within the beverages market space. While existing local players are

gradually buying into this strategy to balance-out their product portfolio, new

players like SAB Miller have shown how this could be a winning strategy in

other African markets. Hence, we see the giant brewer’s acquisition of

majority stake in water producing Voltic Nigeria Limited as a clear statement

for the articulation of this strategy. Going forward, we expect that other

brewers will look more into this to add some quantum to growth by taking

advantage of their distribution platforms and production complementarities.

� Leveraging global scale: By design, Nigerian industry majors are

subsidiaries of much larger entities who simultaneously serve as their technical

partners. Besides enjoying technical and managerial competence, they

leverage on the parents’ global supply chain to purchase their inputs at

relatively more competitive rates. In return, the companies pay royalty and

technical fee to the parent bodies estimated at 3%-4% of net sales.

� Product innovations: While taste may remain materially the same, the re-

packaged products of brewers have consistently impressed a new look appeal

in the minds of consumers. Brewers have successfully deployed this “old-wine-

in-a-new-skin strategy” to stimulate fresh demand for their products by

leveraging on its psychological impact on consumers. Nonetheless, we have

seen pockets of newly introduced global trademarks into the Nigerian market

and market acceptance has been quite encouraging. Canned products are

becoming an increasingly potent means to enhance beer availability and

acceptability, helping to secure a larger share of consumer spends. While this

has helped in boosting volume growth, it also exposes the brewers to the

vagaries of aluminium markets.

However, we could see some cost efficiency gain from local sourcing of cans

given the recent completion of GZ Industries Limited can manufacturing plant

which is the first of its kind in West Africa. The plant has an installed capacity

of 600 million cans per year and plans to double capacity to 1.2billion in 2011.

According to industry sources, can importation requires an average lead

time of 16-20 weeks and damage rate during shipment is put at about 20%-

25%. Substantial efficiency gains could accrue from this end in the medium-

term if cans are completely sourced domestically.

Both micro and major brewers are

exploring the full beverage portfolio

strategy

Global technical partners charge 3-

4% of net sales as technical fee

annually

New international brands are being

introduced in additional to re-

packaging of existing brands



� Segmentation: Significant milestone has been achieved with regards to

market segmentation along the line of low-price economic beer and premium

segments, though we are seeing some degree of convergence as the major

brewers are stratifying their product portfolio to play in both markets. Products

in the economy segment are aimed at competing in the space predominantly

occupied by micro brewers serving the low income consumers. In recent

times, upward drifting by consumers is encouraging on this front though

significant portion of this market is served by makers of traditional liquor.

Even at the top end of the market, brewers are increasingly making their

products become affordable luxury.

� The market grid below gives a detailed picture of how the players operate in

different market segments.

Fig 9: Type

Lager (62%) Malt (24%) Stout (14%)

Category

Premium

Heineken (1) Maltina (1) Guinness Extra Stout (2)

Beck's (4) Amstel (1)

Malta Guinness (2)

Mainstream

Star (1) Top Malt (2) Legend Extra Stout (1)

Gulder (1) Maltex (3)

Harp (2)

Economy

"33" Export (3) Hi-Malt (3) Turbo king (3)

Goldberg (5) Champ Malta (4) Williams Dark Ale (5)

Champion Lager (4) Malta Gold (5)

Note: 1 Nigerian Breweries Plc's products

2 Guinness Nigeria Plc

3 Consolidated Breweries Limited

4 Champion Breweries Plc

5 Sona Breweries Limited

Lager remains the key market

segment with 62% share of beer

consumption…NB is the dominant

player in this space

Stout controls about 14% of beer

consumption… Guinness is the

dominant player in this space



119 122 126129

133136

140144

148152

156160

165169

174179

80

100

120

140

160

180

200

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

2011F

2012F

2013F

2014F

2015F

42%

56%

3%

(50.00) (40.00) (30.00) (20.00) (10.00) - 10.00 20.00 30.00 40.00 50.00

0 - 14 years

15-64 years

65 years

Femal Male

Industry Outlook

In this section, we attempt to assess and provide an outlook for the Nigerian

brewery sector from a valuation perspective. In our 2009 brewery sector report

(Brewers on the Rise, published in September 2009), we detailed the

fundamental drivers of the sector, with a conclusion that the outlook for the

sector was positive. In this update, we test our assumptions against evolving

developments over the past year. Our long-term call on the sector remains

unchanged and is premised on our positive outlook for key growth drivers of the

sector. In this regards, we highlight the following:

� Payout from demographic dividend: We approach this theme from the

angle of population size and structure. The catch to size of 150million people is

the share enormity of potential demand for brewery products and the catch

to structure lies in the sustainability of this demand. Nigeria has a very high

fertility rate of c.5 children per woman driving a population growth estimate of

2.8% p.a. based on IMF estimate. While growing population has engendered

significant challenges to the economic managers, we cannot take away the

inherent demand potential for consumer goods. This has been the key

attraction to the investment case in Nigeria.

� With respect to structure, we have earlier demonstrated that the demographic

structure is bottom-heavy with the potential to generate steady pipeline of

consumers. With an average age of 19 years, Nigerians are quite youthful. A

contributory factor to the low level of aged population is the disturbing level of

life expectancy rate of 47 years, one of the lowest in the world. Brewers are

twisting their product models by targeting this huge base of youthful

population.

� But what impact will this have on beer volume growth?

Source: IMF Source: CIA

Fig 10:

Nigerian population build-up: 2.8% growth Fig 11:

Population structure: bottom heavy

+150 million population base

provides huge potential demand

Bottom-heavy population structure

provides sustainable source of

demand



389.951

823.824

1,141.91

1,839.18

0

400

800

1200

1600

2000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F

� If we work with the conservative assumption of holding other industry drivers

constant, and estimate the expected volume based on the current level of per

capita beer consumption of 10litres p.a., we submit that brewery industry will

need to scale up production level by 2.7mhl to meet up with demand by 2015.

This represents about 18% potential volume growth as demonstrated in

Scenario A in the table below. The upside to this estimate lies in the potential

upside to the current level of beer per capita consumption.

� Using the construction cost of NB’s Ama Greenfield brewery as a reference

point, on an inflation-adjusted basis, we estimate the investment requirement

to fill this gap at N57bn – N84bn (US$380mn – US$560mn) with a minimum

lead time of 12 months.

Fig 12: Estimation of potential volume gap based on 2015 population

2009 2015 Scenarios

A B C

Current beer PCC (Litres): A 10.3 10.0 13.0 17.0

Population (mn): B 151.9 178.7 178.7 178.7

Beer Volume (mhl) 15.4 18.5 23.1 30.0

Potential volume gap (mhl) 2.7 8.1 15.0

A: 2009 beer PCC estimate is based on Heineken's figure B: Population figures are based on IMF estimates

� Rising per capita GDP: Before we diagnose the potential beer volume

impact from this fundamental driver, we highlight that Nigeria per capita

income has shown significant growth over the past 10 years. Based on IMF

figures, we estimate a 10 year CAGR of 13% with GDP per capita rising to

US$1,141 in 2009. This phenomenal growth has been fuelled by substantial

market-friendly macroeconomic reforms aimed at inducing a private-sector led

economic growth. However, growth slowed down significantly in 2009 on the

back of a global economic crunch. From this base, IMF estimated a per capita

income growth of 8.3% over the next 5 years with GDP per capita expected to

hit US$1,839 in 2015.

�

Source: IMF

Fig 13:

Nigerian GDP per capita (current price)

We estimate that population growth

alone should drive beer demand by

2.7mhl through 2015

Capacity addition is warranted;

required CAPEX is massive

Nigeria GDP per capita has

delivered 13% CAGR in the past

decade. We expect 8.3% CAGR

over the next 5 years.

GDP per capita to hit US$1,839 in

2015



0%

5%

10%

15%

20%

25%

30%

0.0% 2.0% 3.5% 5.0% 6.5% 8.0% 10.0%

Beer volume growth

GDP growth

0%

10%

20%

30%

40%

50%

0% 5% 10% 15% 20% 25% 30%

Beer volume growth

Price reduction

� Having reviewed historical GDP per capita performance and forecast over the

next 5 years, we now focus our attention on the intrinsic link between income

and beer volume growth.

� Beer products are both income and price elastic as reflected in the charts

below. This implies that rising income level and price reduction could boost

volume growth significantly. We however observed that income-effect on

volume growth is twice as strong as price-effect. This position is further

strengthened when we consider the mild negative impact of recent economic

slowdown on beer consumption growth and the fact that previous price

increases have had little or no pressure on volume sales. More so, we do not

see the likelihood of significant price reduction playing out due to strong

demand and moderately strong domestic inflation.

� As highlighted previously, we expect SAB Miller to play on pricing, given our understanding of the company’s strategy to focus on cheap beers produced

from cheap domestic inputs. While such strategy could dislocate the current

market share distribution among the key players (though we do not think this

will happen any soon), it will ultimately help to swell the overall pie as beer

penetration will be deepened.

� Using the hypothetical model below, we extrapolate that the expected GDP per

capita growth of 8% in Nigeria implies a potential beer volume growth of 25%

p.a. We think this is quite bullish and is driven by the implicit assumption that

the beer consumption per capita in Nigeria will converge towards global

average of 27litres p.a. (from 10litres currently). While this argument sounds

plausible theoretically, we have some slight reservation with regards to how

quickly this can be achieved given the uniqueness of the Nigerian socio-

political/cultural make-up.

Source: SAB Miller Source: SAB Miller

Fig 14:

Income-effect on beer volume growth: 1 to 3 Fig 15:

Price-effect on beer volume growth: 1 to 1.7

Beer products are both income and

price elastic, though the former is

stronger

We do not expect material price

reduction given steady demand and

modest inflation

Stylised model suggests a 25%

volume growth based on 8%

expected per capita GDP growth



� Premiumisation- A card best fit for tomorrow: In high income per

capita economies where the beer market is relatively saturated and volume

growth potential is limited, brewers are responding by adopting the

premiumisation strategy to open up new value sources. With regards to this

card in driving volume growth, we highlight that the Nigerian market, much like

its emerging and frontier market peers, is still very much unsaturated and could

still deliver superior volume growth with conventional beer products. However,

a much appealing catalyst could be the capturing of the large informal market

niches currently being served by homebrewed liquor makers. A gradual switch

from traditional liquor as income grows is a possible scenario and we regard

that as a typical form of ‘premiumisation’ that could play out in favour of the

major brewers.

� Appealing bar culture: Though it is quite difficult estimating the outlet

density for the Nigerian brewery market space due to data challenges, what is

obvious is the proliferation of selling outlets which are highly concentrated in

the South-West, South-East and South-South regions of Nigeria. Most social

functions among the growing elite and middle class are marked by generous

beer consumption just as frequent daily and weekend fun-catching in bars

contribute meaningfully to the overall consumption rate. While there are strong

religious restrictions in Sharia-compliant states of Northern Nigeria, the pace of

consumption in the south remains unperturbed as bar outlets keep springing up

given their low cost of establishment and absence of any meaningful restriction.



9.55.5

15.0 2.8

5.3

23.1

0

5

10

15

20

25

2005A 5-Year Growth Curent Level Population Effect GDP Effect 2015F Total

Volume

� 2015 Scenarios: Where do we see volume by 2015? In the previous section, we highlighted the different drivers of our

volume growth for the brewery sector, and analysed their potential

impacts on a standalone basis. In this section, we sum it all up by

presenting our consolidated outlook for the sector and where we see

beer volume over the next 5 years (2015).

o Our base case assumption is that beer consumption per capita in Nigeria

will grow to 13litre p.a. in 2015. This level represents about 30% growth

over the current level, just half of global average of 27 litres p.a. and 11%

below the average for African peers. It is worth mentioning that

consumption peaked at 17 litres in 1983, before the ban on imported barley

severely constrained domestic production.

o Our expected beer PCC is driven by 8.3% growth in per capita GDP through

2015 (based on IMF forecasts) as we have established a strong positive

correlation between GDP and beer consumption per capita. Increasing

urbanisation rate should provide additional catalyst.

o We expect population growth rate of 2.8% p.a. through this period (based

on IMF forecast) translating to a population base of 179million in 2015.

Premised on the above, we expect beer demand growth to continue in the high

single digits over our forecast period. Our estimate puts it at 9.1% CAGR

through 2015 (vs. 9.6% actual performance over the past 5 years). Hence, the

combined impact of income and population growth is expected to push beer

demand to 23.1 mhl in 2015, representing 54.3% growth over 2009 level. Even

at this growth estimate, Nigerian beer market still represents 83% of the

current size of South Africa (28 mhl). These fundamentals underlie our

positive outlook for the sector, in terms of potential volume growth.

Source: Vetiva estimate

Fig 16:

Base-case estimate of 2015 beer demand: 9.1% CAGR

We expect beer PCC consumption

to deepen to 13liters by 2015,

rising 30% from current level

Beer consumption is intrinsically

linked to income and population

levels

We forecast 9.1% CAGR in volume

through 2015 (vs. 9.6% historical

performance)

Our forecast suggests that Nigerian

beer demand will hit 23mhl by

2015.



Over the long-term, however, when we think it is more reasonable to assume

some level of convergence in beer consumption rate across key African

markets, we assert that Nigeria has a potential beer market size of 40 mhl,

implying 170% unrealised growth over the current level (excluding the

population effect). However, we argue that Nigeria is not likely to attain

that level of beer PCC during this period due to lag in its income level.

That said, we highlight that current production capacity of local brewers cannot

meet up with this expected surge in demand. More importantly, brewers are

currently operating at close to full capacity utilisation rates due to steady

demand. Hence, supply must be boosted by significant CAPEX in capacity

expansion.

A back-of-the-envelope estimate, using the construction cost of Ama Brewery

(Greenfield), adjusted for inflation and Naira depreciation, suggests that

meeting up with the expected demand gap requires CAPEX of N154bn to

N227bn (US$1.02bn – US$1.51bn). While this investment is significant, we

believe that the industry return on investment is exciting enough to justify

capital injection. We continue to think that this capacity expansion will come

from both existing players and new entrants.

Nigeria has a potential of 40mhl

beer market but we do not see that

materializing due to lag in income

level

Meeting up with expected demand

surge requires CAPEX estimate of

between N154 and N227bn



36%34%

36%

47%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2006 2007 2008 2009

30%

48%

68%71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2006 2007 2008 2009

Investment Thesis

� Growth: Potential is enormous. Based on our estimate, the Nigerian

beer market currently sits on an unrealised volume potential of 40mhl,

representing 170% growth over the current level of 15mhl. While this potential

may not be realised in the short-term, we highlight that GDP per capita growth

and population build-up are proven fundamentals that we are convinced will

drive beer demand to 23mhl in 2015, representing 54% growth over 2009. The

market has delivered growth rates above this level over the past 5 years. We

leave early realisation of this potential growth as upside to our estimate.

� CAPEX requirement is equally high... Current capacity utilisation rates

of local players are quite tight in the region of 90% due to steady demand.

Meeting up with expected demand growth will require significant investment in

the range of N154bn – N227bn (US$1.02bn – US$1.51bn), on our estimate.

Our expectation is that this investment will come from both existing players and

new entrants. For instance, the 2 major global players (Heineken and Diageo)

are increasingly looking at developing markets of Africa as a veritable source of

volume growth for their global portfolio. For the new players like SAB Miller,

getting to a meaningful scale of operation in Nigeria will require significant

CAPEX in capacity expansion.

� ...but potential return gives justification. Nigerian brewers have proven their mettle in value creation ability as reflected in their superior return

on equity (ROE), relative to many other sectors. More instructive is the fact

that this return profile is less levered as the brewers are highly cash generative

and parade low-debt capital structures. The differential in the rate of return on

equity between Nigerian Breweries and Guinness is explained by the degree of

asset utilisation as their margin performances are quite similar. NB has shown

better efficiency in the utilisation of its asset than Guinness, a key value driver

we associate with the economies that accompany operating scale.

Source: Companies financials, Vetiva

Fig 17:

Return on Equity: Nigerian Breweries Plc Return on Equity: Guinness Nigeria Plc

Beer consumption growth will be

driven by population build-up

(2.8% p.a.) and rising GDP per

capita (8.3%)

CAPEX requirement is huge as

current capacity utilization rate is

tight

In our view, the return potential in

the sector should drive this huge

CAPEX injection



31.9%30.2%

10.9% 10.7%8.6%

0.0%

10.0%

20.0%

30.0%

40.0%

Guiness

Nigeria Plc

Nigerian

Breweries

Nigeria (All

Share Index)

BRIC Emerging

Markets

18.8%

13.2%

0.7%

14.8%

9.9%

0.0%

10.0%

20.0%

Guiness

Nigeria Plc

Nigerian

Breweries

Nigeria (All

Share Index)

BRIC Emerging

Markets

In terms of market returns, brewers have done pretty well outperforming BRIC

and Emerging markets basket by a wide margin over the past 10 years. NB and

Guinness market returns bear close semblance to their earnings growth

trajectory over the past decade. In the most recent 5 years, NB and Guinness

have delivered BRIC-like return profile buoyed largely by appealing growth

story in top and bottom lines. This, in our opinion, captures market’s validation

of the sector’s value propositions.

Notes:

1. BRIC and Emerging Market returns are dollar-based, while NSE, NB and Guinness returns are based on domestic currency.

2. Returns are not inclusive of dividends

Source: MSCI Barra, NSE

� New entrants: A positive sum game, in our view. The value and

growth creating opportunities in the brewery sector are proven propositions.

This is affirmed by the increasing attention the market commands from global

brewery giants in their search for growth poles. Existing players are scaling up

CAPEX programmes while new entrants (like SAB Miller, Castel) are acquiring

fringe players with the strategic intent of building capacity in the medium-term.

In our view, the entry of equally-big players will only help to add to the size of

the industry pie in the long-term though we highlight that the medium-term

economics of the brewery market may be pressured. The key pressure points

include pricing power and margins.

� Valuation: Unattractive at current levels; we are on the sideline. While our long-term view of brewers is positive, the fundamental upside

potentials to current market valuations of the key quoted players extensively

covered in this report (Nigerian Breweries Plc and Guinness Nigeria Plc) are

limited over a 12-month investment horizon as we see them fairly priced. The

strong fundamentals of the sector have been priced in. Current prices are well

within our DCF-based fair value ranges.

Fig 18:

10-Year CAGR in share price 5-Year CAGR in share price



Fig 19: Valuation Metrics

NB Guinness Average

Market Cap (N'bn) 589.88 272.86 431.37

Market Cap (US$'bn) 3.93 1.82 2.88

Forward P/E 16.40 14.34 15.37

EV/EBITDA 10.66 8.76 9.71

Market Value per mhl (N'bn) 58.99 68.22 63.60

DCF-based Fair Value 74.30 175.50

Current Price 78.50 185.13

Premium/(Discount) to fair valuation 5.66% 5.49% 5.57%

Rating Neutral Neutral

Notes:

1. NB has a December 31 financial year end, while Guinness has a June 30 financial year end. Forward estimates are

based on this convention.


� Acquisition: A potent source of alpha. For investors having a control perspective, acquisition of existing fringe players, listed or unlisted, could prove

a potent source of accessing alpha returns in the Nigerian Brewery space, if the

technical know-how to operationally revamp these ‘latent values’ can be

provided. While intensive due diligence is warranted especially for those

brewers that have regional presence and advantages, what is obvious is that

there are handful fringe players that need the competitive edge to withstand

industry dynamics and climb along the industry growth path. We have

highlighted earlier that technical partnership with global giants has been a key

success factor for thriving brewers in Nigeria.

In view of the high market valuations of the sector’s key players, we think

direct acquisition and repositioning of fringe players is an attractive call option

to gain profitable exposure to the enormous growth and value opportunities in

the brewery sector. SAB Miller is already treading this path using the

acquisition of fringe players as launching pads. In our view, this is a cheap

means of gaining access to the second largest beer market in Africa, as

at now.

Growth attraction is priced-in as

current valuation presents marginal

alpha generation potential

Acquisition of fringe players is a

potent source of alpha, at current

level, from control perspective



Quoted Companies

Brewers Price (N) Shares Outst. Market Cap Market cap YtD share Analyst

(mn) (N'mn) (US$mn) share perf. rating

Nigerian Brew. Plc. 78.50 7,563 571,352 3,809 66.3% 42% Neutral

Guinness Nig Plc 185.13 1,475 273,053 1,820 31.7% 45% Neutral

Int'l Brew. Plc. 6.71 2,013 13,507 90.0 1.6% 196% Not rated

Champion Brew. Plc. 2.46 900 2,214 14.8 0.3% -22% Not rated

Jos Int. Brew. Plc. 3.36 562 1,888 12.6 0.2% -11% Not rated

Golden Guinea Brew. Plc. 0.68 251 171 1.1 0.0% 0% Not rated

Premier Brew. Plc 0.93 126 117 0.8 0.0% 0% Not rated

862,301 5,749 100.00%

Nigerian Brewery Sector Update: Brewing Growth; Malting Value

Nigeria

0.8

1.0

1.2

1.4

1.6

S-09 D-09 M-10

NB

GUINNESS

NSE ASI

Guinness Nigeria

Investment Thesis

� We expect Guinness to deliver the following

5 years: Volume: 8%, turnover: 12%, earnings: 1

with historical 5-year CAGR of 18% and 23%

respectively.

� We expect this growth to come as Guinness

position as the second largest Nigerian brewer

4.5 mhl installed capacity) to tap into the brewery industry growth

opportunities. The brewer has operating footings in

mainstream, and economic segments of the beer market given its

product portfolio a self-sustaining growth balancing behaviour

economic cycles.

� Guinness key strength lies in its c.80% dominance of the stout market

where the Guinness brand (which commands 75%

mainstream lager brands) holds the ace.

leadership as a viable source of growth as the

14% of the Nigerian beer market. Modest incursion into the lager

segment with strong performance from Harp, coupled with t

expansion of 1.5mhl expected to come on stream by June 2011

provide further headroom for our volume growth

� Guinness shares currently trade at 2011E P/E multiple of

by 27% 2011E EPS growth) and EV/2011

EBITDA margin of 25%. These compare well

EV/EBITDA 9.2x). While we expect 2011 margin performance to be sub

2008, the market share gain (in terms of v

will support strong EPS growth. We expect Guinness market share to

remain attractive at 25%-plus through 2015.

price as we see mild discount to fair value estimate

Fig 20: 52-week Share price performance

; Malting Value I October 2010 I

I Breweries I Equities

Nigerians

46.2%

J-10 S-10

Guinness Nigeria Plc

lowing CAGR metrics over the next

%, earnings: 16%. These compare

f 18% and 23% in turnover and earnings

Guinness leverages its coveted

brewer (27% market share and

4.5 mhl installed capacity) to tap into the brewery industry growth

The brewer has operating footings in the premium,

segments of the beer market given its

growth balancing behaviour through

% dominance of the stout market

(which commands 75% price premium over

holds the ace. We view this undisputed

as a viable source of growth as the stout segment drives

Modest incursion into the lager

segment with strong performance from Harp, coupled with the capacity

expected to come on stream by June 2011, should

volume growth expectation.

2011E P/E multiple of 15.8x (driven

and EV/2011 EBITDA of 9.0, driven by

well with NB’s (2011 P/E 16.6x;

While we expect 2011 margin performance to be sub-

e market share gain (in terms of volume) over the past year

will support strong EPS growth. We expect Guinness market share to

plus through 2015. We are Neutral at current

price as we see mild discount to fair value estimate.

Stock Data

Market Price (N)

Shares Outs (bn)

Market cap (N’bn)

Fair value range

Rating

Price Perf.

12-month (%)

6-month (%)

3-month (%)

Financials

Turnover (N'bn)

EBITDA (N'bn)

PAT (N'bn)

EBITDA Marg (%)

PBT Margin (%)

PAT Margin (%)

ROaE (%)

Valuation

P/E (x)

PBV (x)

EV/EBITDA (x)

Div. Yield (%)

Shareholding structure (as @ 2009)

NEUTRAL

22

Guinness

Overseas

Limited

46.0%

Atalntaf

Limited

7.8%


185.13

1.47

273.05

170 - 182

NEUTRAL

Guinness NB NSE

37.2 44.7 4.7

32.1 11.6 -12.5

11.5 26.5 -0.8

2009A 2010A 2011F

89.1 109.4 122.6

24.4 24.4 28.9

13.5 13.7 17.2

27.4 22.3 23.7

21.3 18.3 20.7

15.2 12.6 14.1

47.0 41.1 46.8

2009A 2010A 2011F

13.4 20.4 15.8

2.7 8.0 7.4

10.7 10.7 9.0

4.1 3.5 4.3


NEUTRAL



25%

21%

18%

0%

5%

10%

15%

20%

25%

30%

10

11

12

13

14

2008 2009 2010

Post-tax earnings (LHS,N'bn) PBT Margin (RHS)

69

89

109

-

20

40

60

80

100

120

2008 2009 2010

Performance Update: FY’10

The FY’2010 results of Guinness lends credence to the continued organic

growth momentum in volume as reflected in 23% YoY growth in turnover.

Turnover hit an all-time high of N109bn and earnings came in with a

defensive posture (PBT: N20bn, PAT N14bn). Key takeawys from this

performance are highlighted below:

� Volume growth treads our expectation line: In the context of our

expectation, Guinness slightly underperformed our turnover forecast of

N111 billion by 2%. This robust performance (23% YoY growth), despite

a 6% decline in Guinness stout volume due to consumers shift to lower

priced beers, is indicative of strong future growth. We note that the

Guinness brand is more vulnerable to shocks in consumer spending

given its price premium of c.75% compared to mainstream lager brands.

Performance in the period under review was driven by modest market

share gain in the lager segment where Harp has been performing

strongly. Malta Guinness and Smirnoff brands are also contributing to

growth.

� Bottom lines threw ample surprise elements: While the strong

growth in sales is yet to be fully reflected on earnings due to elevated

marketing expenses and high input costs, FY’10 margin performance

came in well ahead of our expectation with post-tax earnings climbing

marginally by 1.4% to N14bn as against our expectation of 14% decline.

� 10% DPS growth on higher payout: Guinness outperformed our

dividend expectation by wide margin. This was driven by 2 major factors

which we view in positive light: earlier-than-expected margin recovery

(we expected 11% vs. 13% actual), and higher payout ratio (we

expected 80% vs. 88% actual). DPS declared is N8.25.

Source: Company, Vetiva Research

Fig 20:

Turnover (in N’bn) PAT (in N’bn) and PBT margins


Nigeria

Company Overview

� Guinness Nigeria Plc has about 50 years of

Nigeria. The company was licensed to brew, bottle and market Guinness

products and was listed on the Nigerian Stock Excha

1985 under the breweries sector. It is the second largest brewer in

Nigeria with a beer market share (by volume) of about 27

capacity to produce 4.5 mhl per annum.

� Guinness Nigeria Plc operates under the Diageo Group, a multinational

beer, wine and spirits company, trading i

world spanning 7 continents. Nigeria has grown in relevance to be one of

Diageo’s most strategic markets for Guinness

2009, Guinness Nigeria contributed 4.1%

� The company has four (4) brewing plants located in 3 states: Ikeja and

Ogba Breweries in Lagos state, Benin

brewery (Abia state). Much in line with the regional configurati

brewery plants in Nigeria, all Guinness’ breweries are located in reg

south of the River Niger (South West and South

beer market is predominantly unregulated by religi

� The Company produces five major brands: Guinne

Spark, Harp lager, Malta Guinness and

have been promoted under the platform of various thematic campaigns

with music and reality shows as key selling attractions

� Guinness Nigeria Plc is ultimately owned by the Diageo Group and its

market value of N273bn (US$1.82bn), represe

cap of Nigerian equity market size.

Fig 21:

Geographic foot print of Guinness; generates 99% of sales in Nigeria



Guinness Nigeria Plc has about 50 years of operating experience in

Nigeria. The company was licensed to brew, bottle and market Guinness

products and was listed on the Nigerian Stock Exchange in November

ector. It is the second largest brewer in

et share (by volume) of about 27% and

Guinness Nigeria Plc operates under the Diageo Group, a multinational

beer, wine and spirits company, trading in over 180 markets around the

world spanning 7 continents. Nigeria has grown in relevance to be one of

Guinness stout in the world. In

to the Group’s net sales.

brewing plants located in 3 states: Ikeja and

Ogba Breweries in Lagos state, Benin brewery (Edo state) and Aba

rewery (Abia state). Much in line with the regional configuration of

breweries are located in regions

south of the River Niger (South West and South-South Nigeria) where

beer market is predominantly unregulated by religion consideration.

The Company produces five major brands: Guinness stout, Gordon’s

and Smirnoff Ice. These products

have been promoted under the platform of various thematic campaigns

with music and reality shows as key selling attractions.

Guinness Nigeria Plc is ultimately owned by the Diageo Group and its

2bn), represents 4.1% of the market


Key

Brewery

Malting plant

National boundaries

Major cities

Federal capital

Geographic foot print of Guinness; generates 99% of sales in Nigeria

24



27%

22%

25%26% 26%

0%

5%

10%

15%

20%

25%

30%

-

40

80

120

160

200

2009 2010 2011F 2012F 2013F

Turnover EBITDA PAT EBITDA margin

Forecasts

We are optimistic about Guinness growth prospects given our positive

outlook for the brewery industry and our view that Guinness is well

positioned to transform underlying growth potential in beer consumption

into value for shareholders. We are more positive on profitability stance

given our expectation that margin will rebound strongly in FY’11 as huge

marketing spend takes a breather. We believe capacity expansion will

continue as this could be done profitably given the current demand-supply

dynamics in the industry.

� For 2011FY, we forecast a turnover of N123bn, representing 13% YoY

growth. Our short-term expectation is anchored on growth resumption in

the stout segment of Guinness portfolio. We expect gradual trade-up by

consumers as purchasing power adds weight to play in favour of the

premium segment. While we still expect modest performance in lager

(Harp) and malt (Malta Guinness), we continue to think that competition

from NB could be stronger in these markets.

� Our earnings outlook for 2011FY is very strong given our view that the

market share gain in the past year is yet to pass through to margins as

marketing spend outpaced turnover growth. We thus forecast a PBT

margin accretion of 200bps in 2010FY (PBT Margin: 20.6%). Our margin

expectation translates to post tax earnings of N17bn and EPS of N11.64

(EPS growth of 27%).

� Over the next five years, we forecast a CAGR of 12% in turnover (vs.

18% in the last 5 years) to be driven by both price increase and volume

growth of 8%. Our turnover outlook is premised on Guinness’ flexibility

to play both the economy and mainstream segments of the beer market.


Fig 22:

Key income statement heads forecasts (in N’bn except stated)



� We forecast a 16% CAGR in earnings over the next 5 years (vs. 23%

achieved previously). Our earnings outlook is premised on our view that

margin will rebound from the current trough: 2010 EBITDA margin of

22% vs. 28% historical average. We are looking for an average EBITDA

margin of 26%, which we believe is achievable given Guinness’ record of

operating efficiency.

� We expect earnings to be more than double by 2015, representing a

doubling time of less than 5 years. Historical earnings growth has been

fuelled by powerful base effect and consistent capacity expansion.

Valuation and rating

In the valuation of Guinness Nigeria Plc, we adopt a DCF valuation

methodology (DDM) given the brewer’s stable dividend policy. We assume

an average dividend payout of 85% and discount our expected dividend

streams by an estimated cost of equity (COE) of 14%. Our COE is driven

by a nominal risk free rate of 10%, beta of 0.77 (relative to the NSE ASI)

and an equity risk premium of 5%, much in line with frontier market

benchmark.

Post our explicit forcast horizon (2020), we assumed a terminal growth

rate of 6% guided by the long-term prospect of Nigerian GDP and

Guinness’ relatively higher retention rate (relative to NB). Summing up all

the above, we have the following valuation output for Guinness Nigeria

Plc’s ordinary shares:

� Fair value estimate is N175.50 per share. Sensitizing our model to

growth and COE assumptions gives a fair value range of N170– N180.

� Our fair valuation implies justified P/E multiple of 15.1x (on 2011F EPS)

and EV/EBITDA multiple of 8.3x.

� Current market price is at some premium to fair value; hence, we rate

the stock NEUTRAL but will be quite willing to play the big beer market

at attractive valuation.

� Our DCF-based NEUTRAL rating is consistent with historical market

valuation of the brewer. Guinness has a 5-year historical average P/E

multiple of 18.6x (using the data from September 2005 to date).



-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10


� The stock is currently priced at a P/E multiple of 19.9x, representing

some 5% premium over what is obtainable based on historical market

perception. We do not think there is any fundamental justification for a

change in this long-term valuation multiple.

� However, over a 12-month investment horizon, we think the market

will reward Guinness 2011 EPS growth of 25% which places it forward

P/E multiple at 15.8x (vs. long-term average of 18.6x). This

further adds some fundamental support to our long-term call on

this name.

Fig 23:

Historical P/E multiple: 5-Y average of 18.6x

5-Y Avg. P/E = 18.6x 5-Y Avg. P/E + 1 SDEV

5-Y Avg. P/E - 1 SDEV

Current P/E = 19.9x



Financial Performance

Over the past years, Guinness Nigeria Plc has taken advantage of

favourable dynamics in the Nigerian beer market to deliver robust volume

and earnings growth. We x-ray this performance along key performance

indicators in this section as this provides a solid backgrond to our outlook

of the company as we have highlighed above.

Market position 2006 2007 2008 2009 2010 2011F 2012F

Nigerian Beer market size (mhl) 11.00 12.50 14.50 15.00 16.42 17.83 19.25

Beer market volume growth 22.2% 13.6% 16.0% 3.4% 9.4% 8.6% 7.9%

Population (mn) 140.00 143.85 147.81 151.87 156.05 160.34 164.75

Beer PCC (litres) 7.86 8.69 9.81 9.88 10.52 11.12 11.68

Guinness market share 25.0% 24.0% 25.0% 26.0% 28.0% 27.8% 27.6%

Guinness volume 2.75 3.00 3.63 3.90 4.60 4.96 5.31

Price/mhl 19,510 20,755 19,082 22,859 23,544 24,721 25,933

Growth 2006 2007 2008 2009 2010 2011 2012

Volume 22% 9% 21% 8% 18% 8% 7%

Price/mhl -7% 6% -8% 20% 3% 5% 5%

Turnover 14% 16% 11% 29% 23% 12% 12%

Core Operating profit 5% 16% 19% 23% -2% 22% 18%

EBITDA 8% 14% 18% 22% 0% 19% 17%

PBT 15% 29% 24% 10% 0% 25% 18%

PAT 53% 43% 12% 14% 1% 25% 18%

Profitability 2006 2007 2008 2009 2010 2011 2012

Return on Equity 38% 40% 35% 40% 42% 49% 53%

Return on Assets 14% 16% 16% 18% 18% 20% 20%

Margins 2006 2007 2008 2009 2010 2011 2012

Gross margin 48% 45% 49% 48% 44% 46% 46%

EBITDA margin 28% 27% 29% 27% 22% 24% 25%

EBIT margin 23% 23% 25% 24% 19% 20% 21%

PBT margin 21% 24% 27% 23% 19% 21% 22%

Net Profit Margin 14% 17% 17% 15% 13% 14% 15%

Per share data 2006 2007 2008 2009 2010 2011 2012

EPS 6.31 7.19 8.04 9.18 9.31 11.68 13.79

DPS 4.00 4.50 6.00 7.50 8.25 9.93 11.72

NAPS 17.63 21.45 24.99 21.37 23.19 24.94 27.01

Sales/Share 45.47 42.22 46.90 60.44 74.15 83.10 93.42



Appendix:

Income Statement (N’mn) 2006 2007 2008 2009 2010 2011F 2012F

Turnover 53,652 62,265 69,173 89,148 109,367 122,561 137,781

Cost of Sales (27,845) (34,144) (35,611) (46,510) (61,672) (66,551) (74,402)

Gross Profit 25,807 28,121 33,562 42,639 47,695 56,010 63,379

D & A Expenses (9,511) (8,545) (10,515) (14,000) (18,796) (20,835) (22,321)

A & P Expenses (4,072) (5,349) (6,164) (7,796) (8,568) (10,418) (11,849)

EBITDA 14,901 16,991 19,993 24,408 24,385 28,897 33,863

Depreciation 2,677 2,764 3,110 3,565 4,053 4,139 4,653

Operating profit 12,224 14,227 16,883 20,843 20,331 24,757 29,210

Other income -

159 227 780 - -

EBIT 12,224 14,227 17,042 21,069 21,111 24,757 29,210

Interest Paid (1,551) (1,540) (437) (2,026) (1,052) (946) (1,331)

Interest Received 764 2,197 1,730 1,212 254 1,525 2,024

Profit from operations 11,437 14,800 18,336 20,255 20,314 25,336 29,902

PBT & EI 11,437 14,800 18,336 20,255 20,314 25,336 29,902

Exceptional Income

(1,243) (1,263) (325) - -

PBT 11,437 14,800 17,093 18,992 19,989 25,336 29,902

Taxation (3,997) (4,193) (5,232) (5,451) (6,252) (8,107) (9,569)

PAT 7,440 10,607 11,861 13,541 13,736 17,228 20,333

Balance Sheet 2006 2007 2008 2009 2010 2011F 2012F

Fixed Assets 29,532 30,125 36,733 35,898 38,245 45,992 51,703

Intangible Assets - - 1,311 1,807 1,382 1,021 659

Long term Debtors 182 268 534 399 443 532 598

Stocks 12,933 12,721 12,867 16,848 16,153 19,425 21,837

Debtors & Prepayments 3,231 6,662 6,529 9,105 9,094 9,994 10,705

Deposits for imports 51 26 108 3,991 376 452 508

Cash and bank balances 13,921 22,007 15,108 5,821 12,705 16,863 19,975

Total Assets 59,850 71,809 73,191 73,869 78,397 94,278 105,986

Creditors & Accruals 20,670 21,568 20,148 24,244 30,648 36,385 40,374

Bank Overdrafts - - 3,705 6,897 - 4,506 6,655

Deferred Tax Liability 6,969 6,647 7,886 8,094 8,356 10,049 11,297

Term loan 8,500 8,500 - - 1,299 - -

Provision for gratuity 2,764 3,455 4,589 3,108 3,895 4,684 5,265

Total Liabilities 38,902 40,171 36,328 42,344 44,198 55,624 63,591

Share capital 590 737 737 737 737 737 737

Share premium 1,546 1,546 1,546 1,546 1,546 1,546 1,546

Revaluation Reserves 3,790 3,751 3,738 3,303 3,296 3,296 3,296

Revenue Reserve 14,874 25,605 30,842 25,938 28,620 31,204 34,254

Shareholders' Equity 20,800 31,639 36,863 31,525 34,199 36,783 39,833


Nigeria

0.8

1.0

1.2

1.4

1.6

S-09 D-09 M-10

NB

GUINNESS

NSE ASI

Nigerian Breweries Plc

Investment Thesis � We expect NB to deliver the following CAGR metrics over the next 5

years: Volume: 7.1%, turnover: 14.5%, earnings: 15.7

compare with historical 5-year CAGR of 17.4% and 40.6

and earnings respectively.

� We expect this growth to be delivered on the back of NB’s market

leadership (60% market share and capacity to produce 10mhl p.a)

which we argue is sustainable till 201

pronounced in the mainstream lager segment

Guilder brands dictate market pace though we have

level of aggression from Harp (Guinness’ main lager brand)

potential of this market, and logically for NB,

consider the fact that lager commands 62% of

� A strong value proposition for NB is its presence along

beer value chain which, in our view, will provide the catalyst for future

operational efficiency. NB recently acquires a 30k tones p.a. malting

plant in furtherance of its local content strategy to mitigate earnings

exposure to FX risk. The key constraint to volume growth is the

inflexibility of NB, unlike Guinness, to partake in

beer market which is being played by Consolidated Breweries (a sister

company majority-owned by Heineken).

� NB shares currently trade at 2010E P/E multiple of 1

13% 2010E EPS growth) and EV/2010

EBITDA margin of 30%. These compare with

15.8x; EV/EBITDA 9.0x). Unlike Guinness,

performance to be at par with 2008 but expect slower growth than

Guinness. We remain Neutral at current price as we see mild discount

to fair value estimate of N175/share.

Fig 24: 52-week Share price performance



Others

45.9%

J-10 S-10

Nigerian Breweries Plc

to deliver the following CAGR metrics over the next 5

14.5%, earnings: 15.7%. These

of 17.4% and 40.6% in turnover

We expect this growth to be delivered on the back of NB’s market

leadership (60% market share and capacity to produce 10mhl p.a)

which we argue is sustainable till 2015. NB’s dominance is more

mainstream lager segment where Star and

Guilder brands dictate market pace though we have recently seen some

(Guinness’ main lager brand). The

for NB, remains strong when we

commands 62% of beer market volume.

A strong value proposition for NB is its presence along the spectrum of

beer value chain which, in our view, will provide the catalyst for future

NB recently acquires a 30k tones p.a. malting

plant in furtherance of its local content strategy to mitigate earnings

exposure to FX risk. The key constraint to volume growth is the

partake in the lower-end of the

beer market which is being played by Consolidated Breweries (a sister

E P/E multiple of 18.0x (driven by

EBITDA of 10.7x, driven by

%. These compare with Guinness’ (2011 P/E

Unlike Guinness, we expect 2010 margin

at par with 2008 but expect slower growth than

at current price as we see mild discount

Stock Data

Market Price (N)

Shares Outs

Market cap

Fair value range

Rating

Price Perf.

12-month (%)

6-month (%)

3-month (%)

Financials

Turnover (N'bn)

EBITDA (N'bn)

PAT (N'bn)

EBITDA Marg (%)

PBT Margin (%)

PAT Margin (%)

ROaE (%)

Valuation

P/E (x)

PBV (x)

EV/EBITDA (x)

Div. Yield (%)

Shareholding structure

NEUTRAL

30

Heineken

N.V.

Group

54.1%


78.50

7.56

571.35

68.82 – 79.77

NEUTRAL

Guinness NB NSE

37.2 44.7 4.7

32.1 11.6 -12.5

11.5 26.5 -0.8

2009A 2010F 2011F

164.2 180.7 209.6

48.5 54.2 62.9

27.9 31.8 37.5

29.5 30.0 30.0

25.2 25.9 26.3

17.0 17.6 17.9

70.8 67.2 76.4

2009A 2010F 2011F

15.4 18.0 16.6

9.3 13.4 11.3

10.5 10.7 9.2

6.5 5.6 6.0


NEUTRAL



82.69

88.44

78.00

80.00

82.00

84.00

86.00

88.00

90.00

Q2'09 Q2'10

16.86

15.88

20.4%

18.0%

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

14.00

16.00

18.00

Q2'09 Q2'10

PAT (LHS) PAT Margin (RHS)

Performance Update: H1’10

Nigerian Breweries saw improving performance in her half year 2010

scorecard with a half year turnover of N88bn and profit after tax of N16bn.

Key takeawys from this performance are highlighted below:

� Turnover grew by 7% YoY: During the half year ended June 2010, NB

reported a turnover level of N88.44bn, representing 7.0% growth over

H1’09. The growth in turnover is a remarkable slowdown when

benchmarked against the average of 20% delivered in the most recent 4

years. The slowdown was more pronounced in Q1’10 as turnover level

was rather flattish relative to corresponding period in 2009. In the first

quarter of 2010, brewer faced a very challenging macroeconomic

environment: tight credit cycle negatively affected key product

distributors, and rising job losses among the middle class hampered

aggregate consumer spending. However, we have noticed resumption in

volume growth in Q2 with a 20% sequential growth in turnover.

� Cost headwinds hit earnings though margin is rebounding:

Despite growth resumption at top line, NB reported a weaker earnings of

N15.88bn in H1’10, representing a decline of 5.8% relative to H1’09.

Earnings have been hampered by the combined impact of rising

production cost and momentous advert spend in Q1. Despite this YoY

decline, we noticed significant improvement in earnings generation in Q2

with a sequential growth of 47.9%. The impressive earnings

performance in Q2 was buoyed by margin rebound in H1 which trended

up in line with historical average of 18% as against 16% recorded in Q1.

Though we observed that H1’10 margin was lower than H1’09 by 204

basis points.


Fig 25:

Turnover (in N’bn) PAT (in N’bn) and Profit margin


Nigeria

Company Overview

� Nigerian Breweries Plc, the largest brewer in Nigeria with production

capacity of 10mhl, commenced operation in Nigeria in 1949. The

company has about 60 years of operating experience in Nigeria and

represents the largest quoted company in Nigeria

report date). In the beer market, NB Plc has a grip of about 60%.

� Nigerian Breweries is a subsidiary of Heineken N.V. and is quite strategic

to the group’s operations in Africa. Heineken is one of the leading

brewers globally in terms of volume sales.

present in 11 African countries, brews and sells more than 200

international premium brands through its global network of breweries

and distributors. In 2009, Nigerian Breweries

5.8% of Heineken’s global sales.

� NB has the broadest footprint of brewery plants in Nigeria with 5

breweries and 1 malting plant strategically located across the country.

The breweries are located in Lagos, Aba, Kaduna, Ibadan and Enugu. NB

Plc has a distinctive geographical advantage with the location

plants as it has leveraged on this to serve broader market space.

� The Company has evolved a very rich product portfolio through

continuous products innovation, re-branding and re

brands in its products bouquet include

Amstel Malta, Fayrouz, and Heineken.

� Heineken N.V. Group holds 54.1% of the issued share capital of NB Plc

with the balance being held by Nigerian

indviduals.

�

Fig 26:

Geographic foot print of NB; generates 99% of sales in Nigeria



Nigerian Breweries Plc, the largest brewer in Nigeria with production

apacity of 10mhl, commenced operation in Nigeria in 1949. The

company has about 60 years of operating experience in Nigeria and

represents the largest quoted company in Nigeria by market value (as at

report date). In the beer market, NB Plc has a grip of about 60%.

Nigerian Breweries is a subsidiary of Heineken N.V. and is quite strategic

to the group’s operations in Africa. Heineken is one of the leading

ms of volume sales. Heineken is operationally

present in 11 African countries, brews and sells more than 200

international premium brands through its global network of breweries

and distributors. In 2009, Nigerian Breweries Plc sales represent about

has the broadest footprint of brewery plants in Nigeria with 5

breweries and 1 malting plant strategically located across the country.

The breweries are located in Lagos, Aba, Kaduna, Ibadan and Enugu. NB

e geographical advantage with the locations of its

to serve broader market space.

has evolved a very rich product portfolio through

branding and re-launching. Principal

ds in its products bouquet include Star, Gulder, Maltina, Legend,

Heineken N.V. Group holds 54.1% of the issued share capital of NB Plc

with the balance being held by Nigerian and foreign institutions and


Key

Brewery

Malting plant

National boundaries

Major cities

Federal capital

Geographic foot print of NB; generates 99% of sales in Nigeria

32



29% 30%30% 30% 30%

20%

22%

24%

26%

28%

30%

32%

-

50

100

150

200

250

300

2008A 2009A 2010F 2011F 2012F

Turnover EBITDA

PAT EBITDA margin

Forecasts

Summarily, our outlook for Nigerian Breweries is broadly positive in terms

of volume growth and profitability. Our outlook is premised on our view

that NB’s market leadship is strong and the brewery sector provides ample

room for volume growth. We think capacity expansion is on the card as

demand surges and this could be done profitably given the current

demand-supply dynamics in the industry.

� For 2010FY, we forecast a turnover of N181.8bn, representing 10% YoY

growth. Our short-term expectation is anchored on continuous volume

growth in key brands during H2’10 as credit becomes relatively more

available for key distributors and consumer discretionary spends get on

the uptrend. We have also anchored our expectation on seasonality as

H2 traditionally contributes about 57% to FY performance.

� Our earnings outlook for 2010FY is a bit stronger at 13.9% YoY growth

premised on our view that margin will remain steady at 18% (vs. 18.0%

recorded in H1’10). NB’s net margin over the past 3 years has remained

in the 17%-mark and we do not see significant deviation in FY’10.

Hence, we forecast 2010FY earnings after tax of N31.8bn translating to

an EPS of N4.21.

� Over the next five years, we forecast a CAGR of 13.4% in turnover (vs.

17.1% in the last 5 years) to be driven by both price increase and ramp

up in volume. Our modest outlook on this front is premised on the

expectation that despite the market dominance by NB, increasing

competitive pressure could slightly dilute it price-setting power. Hence,

we think volume growth is the key variable to watch.


Fig 27:

Turnover (in N’bn)



� Our earnings outlook is premised on our margin assumption for NB:

Average EBITDA margin of 29.6%. On this we forecast a CAGR of 14.8%

in earnings after tax (vs. 40% recorded in the last 5 years). We expect

earnings growth to outpace turnover growth slightly as we think the

huge margin growth delivered over the last 5 years might not be

replicated. This remains one of the upside risks to our earnings estimate

if operating efficiency gains from local content throw upside surprises.

We expect earnings to double by 2015, representing a doubling time of 5

years longer that NB did historically. Historical earnings growth has been

fuelled by powerful base effect and consistent capacity expansion.

Valuation and rating

In line with our valuation approach for Guinness, we adopt a DCF valuation

methodology (DDM) in estimating the fair value of Nigerian Breweries Plc’s

shares premised on an obvious reason: visibility of the brewer’s dividend

policy. We have assumed an average dividend payout of 95% (vs. 85% for

Guinness) and discount our expected dividend streams by an estimated

cost of equity (COE) of 14.4%. Our COE is driven by a nominal risk free

rate of 10%, beta of 0.87 (relative to the NSE ASI) and an equity risk

premium of 5%, much in line with frontier market benchmark.

Post our explicit forcast horizon (2019), we assumed a terminal growth

rate of 5% guided by the long-term prospect of Nigerian GDP and NB’s

relatively lower retention rate (relative to Guinness). Summing up all the

above, we have the following valuation output for Nigeria Breweries Plc’s

ordinary shares:

� Fair value estimate is N73.43 per share. Sensitizing our model to

growth and COE asumptions gives a fair value range of N68.82 – N

79.77.

� Our fair valuation implies justified P/E multiple of 17.1x (on 2010F EPS)

and EV/EBITDA multiple of 9.4x.

� Current market price is at marginal premium to fair value; hence, we

rate the stock NEUTRAL but will be quite willing to play the big beer

market at attractive valuation.

� Our DCF-based NEUTRAL rating is consitent with historical market

valuation of Nigerian Breweries shares. NB’s shares have historically

been priced at a P/E multiple of 20x (5-year average P/E multiple of

using the data from September 2005 to date).



-

10.00

20.00

30.00

40.00

50.00


� The stock is currently priced at a P/E multiple of 21.9x, representing

some 7% premium over what is obtainable based on historical market

perception. We do not think there is any fundamental justification for a

change in this long-term valuation multiple. We however note that, NB

has enjoyed some 10% valuation premium over Guinness; which we

think is justified given NB’s better operating efficiency credentials.

� Over a 12-month investment horizon, we think the market will reward

NB with a normal return given its 2010 and 2011 P/E multiple of 19.4x

and 16.4x (vs. long-term average of 20.4x).

Fig 28:

Historical P/E multiple: 5-Y average of 20.4x

5-Y Avg. P/E = 20.4x 5-Y Avg. P/E + 1 SDEV

5-Y Avg. P/E - 1 SDEV

Current P/E = 21.9x



Financial Performance

Over the past years, Nigerian Breweries Plc has taken strong advantage of

favourable dynamics in the Nigerian beer market to deliver robust growth

and value on the back of commendable operating efficiency. We x-ray this

performance along select KPIs in this section as this provides a

background to our outlook of the company as we have highlighed above.

Market position 2007 2008 2009 2010F 2011F 2012F

Nigerian Beer market size (mhl) 12.50 14.50 15.00 16.42 17.83 19.25

Beer market volume growth 13.6% 16.0% 3.4% 9.4% 8.6% 7.9%

Population (mn) 144 148 152 156 160 165

Beer PCC (litres) 8.7 9.8 9.9 10.5 11.1 11.7

NB's market share 56% 57% 60% 58% 58% 58%

NB volume 7.0 8.3 9.0 9.5 10.3 11.1

Price/mhl 15,964 17,600 18,245 18,884 20,240 21,673

Growth 2007 2008 2009 2010F 2011F 2012F

Volume 15.7% 18.1% 8.9% 5.8% 8.3% 7.6%

Price/mhl 12% 10% 4% 4% 7% 7%

Turnover 29% 30% 13% 9% 16% 15%

Core Operating profit 61% 35% 13% 13% 17% 16%

EBITDA 45% 31% 14% 11% 16% 15%

PBT 70% 35% 10% 12% 18% 16%

PAT 74% 36% 9% 13% 18% 16%

Profitability 2007 2008 2009 2010F 2011F 2012F

Return on Equity 48% 68% 71% 67% 76% 85%

Return on Assets 23% 26% 26% 28% 29% 30%

Margins 2007 2008 2009 2010F 2011F 2012F

Gross margin 53% 49% 46% 48% 48% 49%

EBITDA margin 29% 29% 30% 30% 30% 30%

EBIT/Sales 24% 25% 25% 26% 26% 27%

Pretax Income/Sales 25% 26% 25% 26% 26% 27%

Net Profit Margin 17% 18% 17% 18% 18% 18%



Appendix:

Income Statement (in N’mn) 2007 2008 2009 2010F 2011F 2012F

Turnover 111,748 145,462 164,207 182,905 212,233 244,478

Cost of Sales (52,564) (74,562) (88,734) (95,111) (109,724) (125,662)

Gross Profit 59,184 70,900 75,472 87,795 102,508 118,816

D & A (32,077) (34,314) (33,955) (40,239) (46,691) (54,030)

Core operating profit 27,108 36,586 41,517 47,555 55,817 64,787

Other income 249 192 145 159 191 220

EBITDA 32,587 42,543 48,457 54,788 63,616 73,375

Depreciation 5,230 5,765 6,795 7,073 7,608 8,368

EBIT 27,357 36,778 41,662 47,715 56,009 65,007

Net Interest 519 741 (263) (353) (141) 15

PBT & EI 27,876 37,519 41,400 47,362 55,867 65,022

Exceptional Items - - - - - -

PBT 27,876 37,519 41,400 47,362 55,867 65,022

Taxation (8,933) (11,818) (13,490) (15,156) (17,878) (20,807)

PAT 18,943 25,701 27,910 32,206 37,990 44,215

Balance Sheet 2007 2008 2009 2010F 2011F 2012F

Fixed Assets 50,195 63,558 69,003 72,453 79,698 87,668

Long term Debtors 272 80 206 226 249 274

Investment 150 150 150 150 150 150

Stocks 16,157 20,741 22,065 25,607 30,137 34,716

Debtors & Prepayments 7,586 3,850 3,589 4,307 5,169 6,203

Cash and bank balances 15,796 15,613 11,812 14,632 21,223 24,448

FX purchased for imports 393 421 163 549 637 733

Total Assets 90,548 104,413 106,988 117,924 137,263 154,192

Creditors & Accruals 17,946 25,863 24,290 32,923 38,202 44,006

Taxation 7,298 9,246 13,462 14,398 16,984 19,767

Dividend 4,170 19,667 4,567 6,119 7,218 8,401

Deferred taxation 11,360 14,110 14,322 17,616 21,316 25,153

Gratuity 6,591 3,298 3,777 3,966 4,164 4,372

Total Liabilities 47,365 72,183 60,418 75,022 87,884 101,698

Share capital 3,781 3,781 3,781 3,781 3,781 3,781

Share premium 4,568 4,568 4,568 4,568 4,568 4,568

Capital Reserves 7,325 7,240 7,095 7,095 7,095 7,095

General Reserve 27,509 16,639 31,125 32,736 34,635 36,846

Shareholders' Equity 43,183 32,228 46,570 48,180 50,080 52,291



Other quoted players

In this section, we give a brief insight into the world of 5 other quoted

players on the Nigerian Stock Exchange. As a group, they have a

combined market cap of N19bn (US$124mn), representing less than 3% of

the sector’s market capitalisation and are thinly traded.

International Breweries Plc:

� IB Plc is the 3rd largest quoted brewer in Nigeria with a market cap of

N14bn (US$93mn). The share price has gained 207% YTD on the heels

of company-wide restructuring, capacity expansion and successful

turnaround in volume growth and profitability.

� The Company was incorporated in December 1971 primarily to carry

out the business of brewing beer and non-alcoholic malt drinks. Its

brewery is sited in Ilesa, Osun State. Some of the company’s products

include Trophy Lager Beer and Beta Malt.

� Following accelerated CAPEX programme in the past 2 years (about

N3billion) geared towards facility upgrade and capacity expansion,

International Breweries has set the stage for a robust performance.

Volume and turnover in 2009 increased 59% and 74% yoyo

respectively, with the company increasing installed capacity to 500k hl

p.a.

� In April 2010, the Company launched Kronenbourg, Wilfort and Castel

beer, an offshoot of a new partnership with Calsberg and plans to

reintroduce its malt drink (Beta Malt).

� In H1’10, the South-West based brewer recorded its highest profit in 11

years of losses. PAT climbed to N983 million from loss position of

N66million in H1’09, just as turnover jumped 166.14% to N1.88 billion.



Champion Breweries Plc

� Champion Breweries Plc is the fourth largest quoted brewer (based on

market capitalisation) with N2.3bn (US$16mn) market value. The stock

has lost 18% of its value YTD.

� Located in Uyo, Akwa Ibom State, it was incorporated in July, 1974 for

the purpose of brewing and bottling lager and Champ Malta drinks and

listed on the NSE in September 1983. The company has a running

partnership with InBev, a global player in the alcoholic drinks market,

in the domestic production of Beck’s in Nigeria. The Brewery has an

installed capacity is 500,000 hl of beer p.a.

� The latest performance numbers of the company (FY December 2009)

revealed operational challenges with turnover declining by 18% to

settle at N1.2bn. A stronger loss position was recorded as loss before

tax climbed to N1bn (vs. loss of N851mn in 2008).

Jos International Breweries Plc

� JIB Plc has a market value of N1.9bn (US$13mn) and the stock has lost

11% YTD.

� Jos International Breweries Plc (JIB) came into existence in 1975

following a tripartite investment agreement signed between the

Government of Plateau State of Nigeria, the Danish firm of A/S

Cerekem International Limited and the Industrialization Fund for

Development Countries IFU. JIB is involved in the brewing of lager beer

in the brand names of ‘Rock’ and ‘Class’ as well as the production and

sale of malted drink in the brand name of ‘Malt Royale’.

� The latest performance scorecards of JIB (2008 FY) revealed a turnover

of N1.01bn and a loss of N0.60bn.

Golden Guinea Breweries

� Golden Guinea Breweries plc has a market capitalisation of N171mn

(US$1.1mn).

� Golden Guinea Breweries Plc was incorporated in September 1962 and

subsequently listed in 1979. Located in Aba, the Company is engaged in

the brewing, bottling and marketing of Golden Guinea lager beer and

Eagle Stout, as well as the production and marketing of Bergedorf

premium lager beer and Bergedorf Malta under a franchise from Holsten

Brauerei AG of Hamburg.

� The company has no relevant performance update in the public domain.



Premier Breweries Plc

� Premier brewery has a market value of N117mn.

� The Company was incorporated in 1976 and subsequently listed on the

floor of the NSE in 1988. It is located in Onitsha, Anambra State and

was incorporated for the purpose of brewing alcoholic products.

� Financial performance numbers for the past 3 years revealed that

production must have been suspended as the company recorded zero-

turnover and mounting loss positions.



Un-quoted players

While we have a handful of fringe quoted players recording operating

losses, it is exciting to point out that the big unquoted players are faring

quite well with relatively good market shares in the upper single digits.

Consolidated Breweries Limited

� Consolidated Breweries was incorporated in 1980 and is credited as the

third largest brewer in Nigeria after NB and Guinness, in terms of

volume share. Consolidated Breweries operates two breweries located

in Ijebu Ode, Ogun State and Awo Omamma, Imo State. The Company

has remained unshaken by the market majors, shaping a niche for itself

in the low price segment of the beer market.

� Consolidated Breweries is majority-owned by Heineken with a

controlling interest of 50.4%. The Company is involved in the brewing

of its main lager brand. “33” Export, the Hi-Malt brand, a non-alcoholic

drink, and “Turbo King” which is its main route into the stout market.

Consolidated Breweries’ market share has been in the 7-9% range.

� In a bid to further improve its current products mix, the Board recently

acquired 95.05% equity holding in Dumex Industries Limited/Maltex at

a cost of US$11.3 million following the divestment of CFAO Nigeria Plc.

The acquisition of DIL/Maltex will enable the company leverage on the

brand resilience of Maltex which is a mainstream malt drink.

Consolidated Breweries originally produces Hi-Malt, which serves the

low-income end of the malt segment.

� This acquisition and the introduction of new products (Turbo King) are

already contributing to turnover as the company recorded 18% YoY

growth in turnover (FY’09: N20.7bn) though PAT dipped by 10.5% YoY

to N2.7bn, due to unfavourable increase in energy cost, finance charges

and higher effective tax rate.

� The company paid final dividend of N3.52 per share for 2009FY, making

the total dividend paid N1.39 billion. This represents a payout of 52%.



Sona Breweries Limited

� Sona Breweries is a member Company of the Sona Group which is in

the business of manufacturing beer, beverages, plastic and glass ware.

The Group practices a strategy of acquiring distressed companies and

turning them around by investing modern technology and efficient

management. In line with this strategy, the Group has stakes in

several other fringe brewers in Nigeria such as International Beer and

Beverage Industries (Nigeria) Limited (IBBI), Champion Breweries

Limited, Uyo, and Benue Breweries, and Life Breweries and Company

Limited.

� Together, the above mentioned breweries are responsible for the

brewing of several alcoholic and non alcoholic products in the Nigerian

breweries market, some of which are Kronenbourg Beer, Tigre Bock,

Champion Lager Beer, and Champ Malta. Renowned brands from the

stables of the parent Company include Maltonic (a malted drink), Sun

Top (a line of packaged juices marketed under a franchise

arrangement), Wilfort Dark Ale, a 7.6% alcoholic product which enjoys

a monopoly position in the small ale segment of the lager market.

� However, in the recent past, we have watched the Company emerge

from its previously inactive state, launching two new brands into the

Nigerian drinks market. The products are Williams, another dark ale,

quite like the previous Wilfort Dark Ale and Malta Gold, in the malt

drinks market.



Investment Recommendations

Vetiva uses a 5-tier recommendation system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell.

� Buy/Overweight ≥ +25% expected absolute price performance

� Accumulate +10% to +25% expected absolute price performance

� Neutral/Hold +/-10% range expected absolute price performance

� Reduce -10% to -20% expected absolute price performance

� Sell/Underweight ≤ -20% expected absolute price performance

Definition of Ratings

Buy/Overweight recommendation refers to stocks that are highly undervalued but with strong fundamentals and where

potential return in excess of or equal to 25% is expected to be realized between the current price and analysts’ target

price.

Accumulate recommendation refers to stocks that are undervalued but with good fundamentals and where potential

return of between 10% and 25% is expected to be realized between the current price and analysts’ target price.

Neutral/Hold recommendation refers to stocks that are correctly valued with little upside or downside where potential

return of between +/- 10% is expected to be realized between current price and analysts’ target price.

Reduce recommendation refers to stocks that are overvalued but with good or weakening fundamentals and where

potential return of between -10% and -20% is expected to be realized between current price and analysts’ target price.

Sell/Underweight recommendation refers to stocks that are highly overvalued but with weak fundamentals and where

potential return in excess of or equal to -20% is expected to be realized between current price and analysts’ target price.

Disclosures: Analyst Certification

The research analysts who prepared this report certify as follows:

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regarding the companies, securities, industries or markets discussed in this report.

� That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to

the specific recommendations, estimates or opinions expressed in this report.

Other Disclosures

Vetiva Capital Management Limited or any of its affiliates (collectively “Vetiva”) may have financial or beneficial interest in

securities or related investments discussed in this report, potentially giving rise to a conflict of interest which could affect

the objectivity of this report. Material interests which Vetiva may have in companies or securities discussed in this report

are herein disclosed:

� Vetiva may own shares of the company/subject covered in this research report.

� Vetiva does or may seek to do business with the company/subject of this research report

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report

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Disclaimer

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views presented in this material have not been reviewed by, and may not reflect information known to, professionals in

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